The Approaching Reallocation Rally

In recent months, governments around the world have begun to increase monetary stimulus and initiate other pro-growth measures, while in those countries having fiscal austerity imposed on their populations, there are the seeds of revolt as the pain has become, in many cases, unbearable. As a result, governments are falling left and right.

Stepping back from the daily flood of news releases, it would seem that out of the current turmoil, the global economy is bottoming out and is in the early stages of what should be a long period of rising prosperity. The ultimate driving force, whether maintaining the standard of living of the American middle class or bringing billions in the Third World out of poverty, will mandate a global drive for growth.

Well-managed multinational corporations will be both the enablers and the principal beneficiaries of successful pro-growth initiatives by the politicians and bureaucrats. The ironic tragedy of all this is just how few investors are likely to benefit from it and how badly those hiding in bonds will get burned when faster growth and tighter monetary policies return.

Against many odds, the rally in the U.S. stock market has continued into 2012.

Particularly odd is that the more than doubling in the S&P 500 has been ignored by retail investors as their appetite for investment in the U.S. stock market continues to be almost nonexistent.

Nevertheless, it remains impressive to me that stocks are doing well despite retail investors' liquidation and their absence of participation.

To me, there is an inevitability that they will return (albeit slowly).

The Investment Company Institute reports that March outflows from stock funds totaled $9.62 billion compared to an inflow of $1.38 billion in February. That figure included $2.02 billion of funds committed to non-U.S. equity markets, however, bringing the outflow from domestic equity funds to $11.63 billion in March compared to an outflow of only $1.66 billion in February.

Fixed-income funds continue to thrive, as highlighted by an inflow of nearly $3 billion in March into high-yield funds vs. an inflow of over $5 billion in February.

I have previously highlighted the reasons for $450 billion of domestic equity outflows since 2007:

a lost 13 years of investment returns (since 1998);

two large drawdowns in the U.S. stock market since 2000 -- these were two of the only five greater-than-40% stock market drops since 1900;

a flash crash (whose origin is still unknown);

the shock from the depth of the Great Decession of 2008-2009;

a 35% nationwide drop in home prices, limiting the opportunity for home equity loans and cash-out refinancing;